The wait is almost over. In less than 24 hours, the world will learn whether the Federal Reserve will remove the “patient” language from its policy statement — opening the door to the first interest-rate hike since 2006 as soon as June.
That’s right. It’s been almost a decade since the price of money actually increased; but in as little as three months, it could start rising again.
To say this is going to be a big deal doesn’t quite capture the severity of what’s about to play out. Heading into the meeting, Fed officials talked up the health of the job market, apparently looking past a weakening in the economic data (much of it weather related) and inflation measures (much of it due to the drop in oil prices).
Investors kept stocks volatile on Tuesday — but within the confines of the trading range seen over the past few days — reflecting nervousness just beneath the surface by an unwillingness to place big directional bets ahead of the Fed statement on Wednesday afternoon.
In the end, the Dow Jones Industrial Average lost 0.7%, the S&P 500 lost 0.3%, the Nasdaq gained 0.2% on excitement over a TV service from Apple Inc. (NASDAQ:AAPL), and the Russell 2000 gained 0.2%.
Material stocks were the laggards, losing 1.2% as a group after E I Du Pont De Nemours And Co (NYSE:DD) lost 3.1% on an analyst downgrade from Bank of America/Merrill Lynch.
Crude oil continued its downward slide, losing another 1.7% to close at $43.15 a barrel, but not before testing below the $43 handle for the first time since early 2009. This is the sixth consecutive loss for the black stuff. That pushed up the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers back on March 9 to a gain of more than 32%. Oil prices fell back below the $43 level after the close on a larger-than-expected inventory build.
Continuing the trend of softer-than-expected economic data was a 17% month-over-month drop in housing starts — the largest sequential decline in four years and the lowest level since January 2014.
The string of weakness has been enough to push the Citigroup Economic Surprise Index, shown above, down to levels not seen since 2012.
Whether or not the Fed will look past this softness — possibly resulting in a downward revision to the “dot plot” of interest rate expectations — will soon be learned. No matter what happens, tomorrow will surely be a wild ride.
For what it’s worth, the latest Bank of America Merrill Lynch Global Fund Manager survey revealed that a growing share of professional money managers are underweight U.S. stocks — which, at a net 19%, is the largest share since January 2008 and a notable swing from the net 6% overweight seen back in February.
Concerns have centered on valuations with earnings under threat from the dollar’s strength (which diminishes the value of foreign profits) and oil weakness (since the S&P 500 is more sensitive to commodities as a revenue item rather than an expense item). In fact, a net 23% of respondents said U.S. stocks were overvalued. That’s a high not seen since May 2000, in the heart of the dot-com bubble.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
